The Marketing of MREL Securities after BRRD Interactions between Prudential and Transparency Requirements and the Challenges Which Lie Ahead

Abstract

The interplay between the objectives of financial stability and consumer protection underpinning the bank resolution framework is a very complex one, hence the need of an adequate calibration of safeguards. A flexible approach in phasing-in MREL requirements is, therefore, necessary. If MREL must be institution-specific (Article 4 of the Delegated Regulation), there is hardly any other field of prudential regulation where individual calibrations are more warranted, and the use of general principles of proportionality, subsidiarity and diversity more necessary. In turn, transparency requirements have been progressively strengthened to a point that it is difficult to identify a sure way in which a bank may market to its clients (in particular retail ones) a financial instrument that exposes them to a risk of loss, without being exposed to an action for annulment or for damages, and without fully denaturalising the marketing process, i.e. turning it into a series of ominous warnings. It is difficult to imagine a massive retail distribution of MREL securities in Italy and in several other Member States under these circumstances. Anecdotal evidence shows the travails that result from the impact of ‘micro’ issues on a ‘macro’ level and vice versa. If one fails to grasp this connection, the legal system itself would end up exacerbating, instead of preventing, clashes between financial stability goals and consumer protection needs. In this vein, we argue that in the determination of individual MREL requirements and in the sale of MREL securities an approach based on the extensive use of proportionality should be adopted. This, to our minds, is essential to credibly answer the question to whom may MREL securities be marketed. For sure, the answer to this question needs to reconcile prudential and transparency requirements and this is an intractable problem, but one that must be addressed if MREL funding needs must be safely met in the near future. For once, proportionality, despite its open-textured nature, may call for bright-line rules in what concerns the marketing of the instruments, when applied to MREL requirements. Otherwise, banks may be caught in the middle of open standards for resolvability, on one hand, and consumer protection, on the other, with the result that they may be required to place a massive volume of securities, but find no public to place them, or else risk public outrage if they go under. Marketing standards and employee training need to improve, but there has to be a clearer idea of what a proper, and workable, marketing process looks like, and how that translates into specific warnings that are adequately understood by the client, but also leave the bank and its employees with a clear conscience.

Keywords: BRRD, MREL, securities, transparency, prudential requirements

JEL Classification: G14, G18, K20, K22